The Redistributive Effects of Financial Deregulation / Anton Korinek, Jonathan Kreamer.

Format:

Book

Author/Creator:

Korinek, Anton.

Contributor:

Kreamer, Jonathan.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w19572.

NBER working paper series no. w19572

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2013.

Summary:

Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation center stage. We develop a model in which the financial sector benefits from risk-taking by earning greater expected returns. However, risk-taking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. Assuming incomplete risk markets between the financial sector and the real economy, we describe a Pareto frontier along which different levels of risk-taking map into different levels of welfare for the two parties. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit. We also show that financial innovation, asymmetric compensation schemes, concentration in the banking system, and bailout expectations enable or encourage greater risk-taking and allocate greater surplus to the financial sector at the expense of the rest of the economy.

Notes:

Print version record

October 2013.